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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-30057
CANAL ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1733577
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street, Cambridge, Massachusetts 02142-9150
(Address of principal executive offices) (Zip Code)
(617) 225-4000
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock November 1, 1996
Common Stock, $25 par value 1,523,200 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CANAL ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
ASSETS
(Dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $448 553 $436 531
Less - Accumulated depreciation and
amortization 176 582 163 929
271 971 272 602
Add - Construction work in progress 3 389 5 759
Nuclear fuel in process 254 122
275 614 278 483
LEASED PROPERTY, net 12 692 13 128
INVESTMENTS
Equity in corporate joint venture 3 421 3 372
CURRENT ASSETS
Cash 832 12
Accounts receivable-
Affiliated companies 8 476 9 282
Other 10 764 9 520
Electric production fuel oil 878 762
Prepaid property taxes - 874
Other 3 683 3 435
24 633 23 885
DEFERRED CHARGES
Seabrook 1 5 454 6 436
Seabrook 2 1 912 3 343
Other 19 305 20 813
26 671 30 592
$343 031 $349 460
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CANAL ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized - 2,328,200 shares
Outstanding - 1,523,200 shares,
wholly-owned by Commonwealth
Energy System (Parent) $ 38 080 $ 38 080
Amounts paid in excess of par value 8 321 8 321
Retained earnings 51 980 52 070
98 381 98 471
Long-term debt, including premiums, less
current sinking fund requirements and
maturing debt 83 611 83 941
181 992 182 412
CAPITAL LEASE OBLIGATIONS 12 114 12 547
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 15 250 23 425
Advances from affiliates 14 565 5 865
Maturing long-term debt - 3 230
29 815 32 520
Other Current Liabilities -
Current sinking fund requirements 350 920
Accounts payable -
Affiliated companies 1 127 2 049
Other 19 884 19 757
Accrued taxes -
Income 1 289 3 159
Local property and other 1 366 855
Capital lease obligations 578 581
Accrued interest and other 4 106 3 608
28 700 30 929
58 515 63 449
DEFERRED CREDITS
Accumulated deferred income taxes 71 981 72 914
Unamortized investment tax credits and other 18 429 18 138
90 410 91 052
COMMITMENTS AND CONTINGENCIES
$343 031 $349 460
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
1996 1995 1996 1995
ELECTRIC OPERATING REVENUES
Sales to affiliated companies $27 959 $26 710 $ 77 924 $ 69 469
Sales to non-affiliated companies 19 969 17 182 58 192 35 878
47 928 43 892 136 116 105 347
OPERATING EXPENSES
Fuel used in production 21 453 16 371 59 355 32 669
Electricity purchased for resale 2 624 4 013 5 716 12 524
Other operation and maintenance 10 126 10 222 29 374 29 314
Depreciation 4 546 4 292 13 638 12 407
Taxes -
Income 2 277 2 191 7 761 (1 482)
Local property 652 710 1 885 2 091
Payroll and other 170 176 593 594
41 848 37 975 118 322 88 117
OPERATING INCOME 6 080 5 917 17 794 17 230
OTHER INCOME 144 53 2 245 131
INCOME BEFORE INTEREST CHARGES 6 224 5 970 20 039 17 361
INTEREST CHARGES
Long-term debt 1 983 2 056 6 038 6 177
Other interest charges 567 527 1 574 1 392
Allowance for borrowed funds
used during construction (25) (247) (80) (532)
2 525 2 336 7 532 7 037
NET INCOME 3 699 3 634 12 507 10 324
RETAINED EARNINGS -
Beginning of period 52 089 51 711 52 070 51 647
Dividends on common stock (3 808) (3 046) (12 597) (9 672)
End of period $51 980 $52 299 $ 51 980 $ 52 299
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Dollars in thousands)
(Unaudited)
1996 1995
OPERATING ACTIVITIES
Net income $12 507 $10 324
Effects of noncash items -
Depreciation and amortization 17 227 16 502
Deferred income taxes and investment
tax credits, net (1 312) (4 931)
Earnings from corporate joint venture (380) (408)
Dividends from corporate joint venture 331 559
Change in working capital, exclusive of cash
and interim financing (1 587) (2 132)
All other operating items 644 (291)
Net cash provided by operating activities 27 430 19 623
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (10 328) (19 830)
Allowance for borrowed funds used
during construction (80) (532)
Net cash used for investing activities (10 408) (20 362)
FINANCING ACTIVITIES
Proceeds from (payment of) short-term borrowings (8 175) 5 500
Payment of dividends (12 597) (9 672)
Advances from affiliates 8 700 5 460
Long-term debt issue refunded (3 420) -
Sinking fund payments (710) (549)
Net cash provided by (used for) financing activities (16 202) 739
Net increase in cash 820 -
Cash at beginning of period 12 12
Cash at end of period $ 832 $ 12
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 7 117 $ 6 388
Income taxes $10 781 $ 3 081
See accompanying notes.
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CANAL ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
Canal Electric Company (the Company) is a wholly-owned subsidiary of
Commonwealth Energy System. The parent company is referred to in this
report as the "System" and together with its subsidiaries is collectively
referred to as "the system." The System is an exempt public utility
holding company under the provisions of the Public Utility Holding Company
Act of 1935 and, in addition to its investment in the Company, has
interests in other utility and several non-regulated companies.
The Company has 118 regular employees including 91 (77%) represented
by a collective bargaining agreement which expires in May 1997.
The Company is a wholesale power company and operates its two
generating units under life-of-the-unit power contracts on file with the
FERC. The price of power under the power contracts is based on a two-part
rate consisting of a demand charge and an energy charge. The demand charge
covers all expenses except fuel costs and includes the recovery of the
original investment. It also provides for any adjustments to that
investment over the economic lives of the units. The energy charge is
based on the cost of fuel and is billed to each purchaser in proportion to
its purchase of power. Purchasers are billed monthly.
The Company also procures bulk electric power at the request of and
for its affiliates thereby securing cost savings for their respective
customers by planning for a power supply on a single system basis.
(2) Significant Accounting Policies
(a) Principles of Accounting
Generally, expenses which benefit more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax recorded in the interim
period.
The unaudited financial statements for the periods ended September 30,
1996 and 1995, reflect, in the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to summarize
fairly the results for such periods. In addition, certain prior period
amounts are reclassified from time to time to conform with the presentation
used in the current period's financial statements.
The Company's significant accounting policies are described in Note 2
of Notes to Financial Statements included in its 1995 Annual Report on Form
10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting
policies but considers each interim period as an integral part of an annual
period and makes allocations of certain expenses to interim periods based
upon estimates of such expenses for the year.
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CANAL ELECTRIC COMPANY
(b) Regulatory Assets
The Company is regulated as to rates, accounting and other matters by
various authorities, including the Federal Energy Regulatory Commission
(FERC) and the Massachusetts Department of Public Utilities (DPU).
Based on the current regulatory framework, the Company accounts for
the economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The Company has established
various regulatory assets in cases where the FERC has permitted or is
expected to permit recovery of specific costs over time. On January 1,
1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No.
121 imposes stricter criteria for regulatory assets by requiring that such
assets be probable of future recovery at each balance sheet date. As of
September 30, 1996, SFAS No. 121 did not have an impact on the Company's
financial position or results of operations. However, this result may
change as modifications are made in the current regulatory framework
pursuant to electric utility restructuring orders issued by the DPU
including a final order that is expected to be issued by the end of 1996.
For additional discussion of electric industry restructuring activities,
see Management's Discussion and Analysis of Results of Operations.
The principal regulatory assets included in deferred charges were as
follows:
September 30, December 31,
1996 1995
(Dollars in thousands)
Seabrook related costs $ 7 075 $ 9 511
Deferred income taxes 14 229 14 106
Postretirement benefit costs - 1 774
Total regulatory assets $21 304 $25 391
(3) Commitments and Contingencies
Construction
The Company is engaged in a continuous construction program presently
estimated at $57.2 million for the five-year period 1996 through 2000. Of
that amount, $19.1 million is estimated for 1996. As of September 30,
1996, construction expenditures, including an allowance for funds used
during construction, amounted to approximately $10.4 million. The program
is subject to periodic review and revision because of factors such as
changes in business conditions, rates of customer growth, effects of
inflation, maintenance of reliable and safe service, equipment delivery
schedules, licensing delays, availability and cost of capital and
environmental factors. The Company expects to finance these expenditures
with internally generated funds and short-term borrowings.
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CANAL ELECTRIC COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
The following is a discussion of certain significant factors which have
affected operating revenues, expenses and net income during the periods
included in the accompanying condensed statements of income. This discussion
should be read in conjunction with the Notes to Condensed Financial Statements
appearing elsewhere in this report.
A summary of the period to period changes in the principal items
included in the condensed statements of income for the three and nine months
ended September 30, 1996 and 1995 and unit sales for these periods is shown
below:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 and 1995 1996 and 1995
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $ 4 036 9.2% $ 30 769 29.2%
Operating Expenses -
Fuel used in production 5 082 31.0 26 686 81.7
Electricity purchased for resale (1 389) (34.6) (6 808) (54.4)
Other operation and maintenance (96) (0.9) 60 0.2
Depreciation 254 5.9 1 231 9.9
Taxes -
Federal and state income 86 3.9 9 243 623.7
Local property and other (64) (7.2) (207) (7.7)
3 873 10.2 30 205 34.3
Operating Income 163 2.8 564 3.3
Other Income 91 171.7 2 114 1 613.7
Income Before Interest Charges 254 4.3 2 678 15.4
Interest Charges 189 8.1 495 7.0
Net Income $ 65 1.8 $ 2 183 21.1
Unit Sales (MWH) Increase 161 651 20.5 779 650 48.3
Three Months Ended Nine Months Ended
September 30, September 30,
MWH Unit Sales 1996 and 1995 1996 and 1995
Canal Unit 1 628 128 438 166 1 682 838 438 166
Canal Unit 2 147 320 180 325 282 414 692 001
Seabrook 1 90 429 80 901 254 967 246 257
Purchased for Resale 84 907 89 741 173 336 237 481
950 784 789 133 2 393 555 1 613 905
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CANAL ELECTRIC COMPANY
Revenue, Fuel and Purchased Power
Operating revenues for the three and nine months ended September 30,
1996 increased approximately $4 million or 9.2% and $30.8 million or 29.2%,
respectively. The increase in both periods includes higher unit sales and,
during the nine months, reflects the absence of a refund to customers
during the second quarter of 1995 (approximately $7.5 million) due to the
settlement of certain Seabrook-related tax issues. Also affecting
operating revenues in both periods was a decrease in the level of purchases
made on behalf of affiliated retail distribution companies.
Unit sales increased during both current periods primarily due to the
increased availability of Unit 1 which was out of service for the first
seven months of 1995 due to a combination of scheduled maintenance and
unscheduled repairs to the turbine. Somewhat offsetting the increase in
unit sales was the decreased availability of Unit 2 which returned to
service in mid-August 1996, following approximately five months of
scheduled maintenance. Also affecting unit sales in both periods was the
decrease in purchases made on behalf of affiliated retail distribution
companies.
The significant increase in fuel used in production during the
current three and nine-month periods reflects the impact of the previously
discussed Unit 1 outage during the first seven months of 1995 and higher
oil costs. Fuel, purchased power and transmission costs for the current
three and nine-month periods represented approximately 52% and 50%,
respectively, of operating revenues and averaged 2.62 cents and 2.82 cents
per KWH, respectively, as compared to 2.69 cents and 2.96 cents per KWH for
the same periods a year ago.
Other Operating Expenses
During the first nine months of 1996 other operation and maintenance
was virtually unchanged as a decrease in maintenance costs associated with
Unit 1 ($3.8 million) was offset by an increase in maintenance related to
Unit 2 ($1 million) and higher benefit costs ($2.8 million). Other
operation and maintenance expense decreased by less than 1% during the
current quarter as increases in benefit costs ($900,000) and maintenance
related to Unit 2 ($600,000) were virtually offset by lower maintenance
costs ($1.3 million) related to Unit 1. The increase in benefit costs
during both current periods was due primarily to the Federal Energy
Regulatory Commission's (FERC) acceptance of rate schedules which allow the
recovery of previously deferred postretirement benefit costs over a six-
month period which began in March. Depreciation expense increased in both
current periods due to higher levels of plant-in-service. Federal and
state income taxes increased during the nine-month period due to the
absence of a tax adjustment during the second quarter of 1995 that related
to the settlement of certain Seabrook-related income tax issues ($7.5
million) and a higher level of pretax income. The decrease in local
property and other taxes reflects changes in property assessments.
Other Income and Interest Charges
The significant increase in other income during the first nine months
of 1996 was primarily due to the recording of a regulatory asset for costs
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CANAL ELECTRIC COMPANY
associated with postretirement benefits (approximately $1.8 million)
following FERC acceptance of rate schedules which provide for the recovery
of these costs over a six-month period that began in March 1996.
Total interest charges increased 8.1% and 7% during the current three
and nine-month periods, respectively, reflecting an increase in short-term
interest due to a higher average level of short-term borrowings coupled
with a decrease in the debt component of allowance for funds used during
construction, partially offset by lower long-term interest reflecting the
retirement of Series A First Mortgage Bonds during the second quarter.
Electric Industry Restructuring
On August 16, 1995, the DPU issued an order calling for the
restructuring of the electric utility industry in Massachusetts. The DPU's
intent is to reduce electric costs to consumers by providing customers with
the opportunity to choose their electric power provider while retail
electric companies such as Cambridge Electric Light Company and
Commonwealth Electric Company continue to provide transmission and
distribution services. On May 1, 1996, the DPU issued an order containing
proposed rules for implementing electric industry restructuring.
The proposed rules, which were the subject of public comment and
hearings during June and July 1996, provide for:
(1) the establishment of an independent system operator to operate the
regional transmission system;
(2) a power exchange to manage a competitive bidding pool for short-term
power sales;
(3) functional separation of electric companies into generation, trans-
mission and distribution corporate entities;
(4) preservation of discounts for low-income customers, shut-off protec-
tions and provision of service to all customers;
(5) registration requirements for generation suppliers;
(6) options for phased incentives for electric companies to divest their
generation assets;
(7) promotion of environmental goals;
(8) support for energy efficiency and renewable energy resources;
(9) a price cap system of incentive regulation for the remaining distri-
bution and transmission functions;
(10) unbundling of rates on bills into separate components of transmis-
sion, distribution and energy, and implementation of a competitive
generation market by January 1, 1998; and
(11) a reasonable opportunity for recovery of stranded cost.
On August 9, 1996, the DPU issued an order delaying the issuance of final
rules until the end of 1996. The DPU also stated that it will issue a
revised schedule for electric companies to make company-specific unbundled
rate filings.
Although the DPU has not yet issued its revised rate filing schedule,
Cambridge and Commonwealth Electric anticipate filing their revenue-
neutral, unbundled rates in early 1997 after the issuance of the DPU's
final rules. Also, during 1997, Cambridge and Commonwealth Electric will
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CANAL ELECTRIC COMPANY
file their comprehensive restructuring plan. One element of their plan
(announced on February 15, 1996) calls for the auctioning, in a competitive
market, of their capacity entitlement (1,140 MW) in all of their twenty-one
power contracts in an effort to develop a competitive market whereby
customers would have the flexibility of choosing their electric supplier.
These entitlements include contracts for power held by Cambridge and
Commonwealth Electric involving the Company.
Canal Unit 2
September 30, 1996 marked the completion of a two and one-half year
project that will enable Unit 2 to burn natural gas, or a combination of
gas and oil, up to 250 days each year, while maintaining the ability to
burn only fuel oil the remainder of the year. The ability to burn natural
gas in combination with fuel oil will reduce overall emissions by 25%. The
$23 million project included the construction of a 1,400 foot pipeline
under the Cape Cod Canal and a four and one-half mile pipeline through the
adjacent town of Bourne, MA.
Environmental Matters
The Company is subject to laws and regulations administered by
federal, state and local authorities relating to the quality of the
environment. These laws and regulations affect, among other things, the
siting and operation of electric generating and transmission facilities and
can require the installation of expensive air and water pollution control
equipment. These regulations have had an impact on the Company's
operations in the past and will continue to have an impact on future
operations, capital costs and construction schedules of major facilities.
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CANAL ELECTRIC COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
nine months ended September 30, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1996
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CANAL ELECTRIC COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANAL ELECTRIC COMPANY
(Registrant)
Principal Financial Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet, statement of income, statement of retained earnings and
statement of cash flows contained in Form 10-Q of Canal Electric Company for
the nine months ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000016906
<NAME> CANAL ELECTRIC COMPANY
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<PERIOD-END> SEP-30-1996
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<TOTAL-ASSETS> 343,031
<COMMON> 38,080
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